The sharing economy: A futuristic taxi landscape (Part 1 – The future and the uncompromising economics of the past)

Phuah Eng Chye (13 January 2018)

There is a dichotomy in policy discussions on the taxi industry. Within the taxi industry, discussion is trapped by legacy issues on income, employment and competition. Outside, city planners are pursuing a vision of an integrated transport system based on the concept of “mobility as a service” that seeks to converge several modes of transport services into a single, accessible, on-demand mobility service.[1]

The city planner vision favours greater use of public transit and reducing vehicle kilometres miles travelled. This vision aims to reduce the number of cars on the road, presumably including taxis, to reduce congestion, energy use and emissions. The two conversations – one with a foot in the future and the other with a foot stuck in the past – are at odds and this often translates into policy incoherence.

But it is not so easy to resolve the contradictions due to the uncompromising economics of the taxi industry. We can start by examining how cities are going about to achieve their vision. Forward-looking cities are already experimenting with “a multi-modal routing and booking app that aggregates several modes such as biking, transit, taxi and driving, and additional shared mobility services provided locally such as bikesharing, carsharing and ride-hailing.”[2]

This is supported by regulatory changes. A leading example is Finland which “passed the Act on Transport Services in April 2017 to promote user-oriented and competition-friendly transportation services. The Act contains provisions on the interoperability of ticketing and payment systems and mandates that Transportation Network Companies (TNCs) must provide essential data related to mobility services. Additionally, Helsinki’s Ministry of Transport and Communications has partnered with a startup called MaaS global to launch Whim, an app that functions as a trip planner for both public transit and private trip services and offers several multi-modal payment packages for combinations of city-wide public transport, taxi use, car rental, and national public transport.” [3]

But even early on, some of these attractive ideas have already floundered. One prominent setback was the innovative bus service called Kutsuplus launched by the Helsinki Regional Transport Authority in 2013. Kutsuplus was an attempt to reinvent carpooling and to reduce the use of cars. According to Olli Sulopuisto, “the service matched passengers who were headed roughly in the same direction with a minibus driver, allowing them to share a ride that cost more than a regular city bus but less than a taxi…passengers…would log onto a website, top up your account, select the starting and ending points for your journey, and walk to the closest bus stop to wait for the pick-up.”

While ridership growth for this experimental bus service was in line with projections, yet Helsinki authorities shut down Kutsuplus in 2016. Olli Sulopuisto attributes the closure to two reasons. “First was the need for massive scale to make the economics of ride-sharing really work…From the original 15 buses, the fleet was to grow to 45 vehicles in 2016, 100 vehicles in 2017, and later into the thousands. Achieving scale with this model is crucial in order to optimize trips across an entire fleet. With a small number of buses and users, it’s more difficult to match up passengers who are going in the same direction around the same time. This explains why Kutsuplus buses were frequently close to empty.”

“Second was the significant public cost…Scale could not come without funding, however – and in an austere budget environment, that was a problem…the service was heavily subsidized…Rather than investing many millions more into Kutsuplus to bring it to scale, city officials backed away,” Olli Sulopuisto notes.

The closure of this innovative on-demand transit service and difficulties of other initiatives suggests the uncompromising economics remain a formidable obstacle to public transportation. The challenges remain unchanged – namely that scale in the form of paying customers is needed to overcome the funding constraint (operations and capital costs).

But scaling is problematic because transport (costs) are mainly physical, local and maintenance costs rise continuously[4] over time. Transit and taxi fares can only be reduced by paying drivers less or through subsidies from transport agencies or investors. Subsidising fares to make travel affordable places strenuous pressures on budgets and is generally unsustainable. Another problem is that transportation (taxi licenses and fees, parking, fines) is a major source of revenue and reducing transportation costs results in cities and agencies needing to cut their expenditures.

Hubert Horan had hinted of the uncompromising economics when he debunked the proposition ridesharing platforms could radically transform the taxi landscape. He notes “when traditional taxi regulations were established in big cities in the 1920s and 30s, multi-destination options were banned because the (then privately owned) transit operators didn’t want competitors weakening low density routes. When libertarian/anti-public transit advocacy groups fought for taxi deregulation in the 90s, they prominently pointed to these vestigial protections and claimed that regulation had stifled industry “innovation” for example these jitney/paratransit services. These rules were eliminated everywhere; absolutely no innovative services emerged.”

Hubert Horan explains the “operational costs and challenges of taxi service (and delivery/logistical services) have been known for decades, including huge demand peaks, unplannable volatility (demand spikes when it rains), and empty backhauls.” He observes “the industry’s biggest service problems – limited and unreliable car availability when demand is highest…and poor service to lower-density neighborhoods – exist because the true cost of providing peak period and low-density neighborhood service is substantially higher than the fares taxi riders expect (or are willing) to pay and nothing in Uber’s business model reduces the cost of these services.”

The difficultly for supply to react to demand immediately meant that free bus transit[5] and even autonomous vehicles will have limited effect on reducing congestion or car ownership. Bern Grush and Blair Schlecter suggests road traffic congestion is unlikely to be overcome soon due to expanding population in cities, current land use patterns and trip habits. In addition, it is also well known congestion had its own feedback loop and that every easing of congestion generally induces more traffic. Most reports suggest congestion can only be addressed by increasing the price of road access, parking and petrol[6] which will worsen affordability.

Bern Grush and Blair Schlecter also points out tremendous effort will be “required to convert the majority of vehicle owners into ride-buyers” and that a significant reduction in private ownership will not happen until alternatives such as “robo-ride services” achieve “an improvement over the perceived serviceability of private ownership.”

Overall, the aspirations of cities to reduce vehicle congestion, emissions and ownership and to explore the introduction of autonomous vehicles suggest pressures will continue to mount on the traditional taxi regulatory paradigm. While change will not occur as quickly as envisaged due to the uncompromising economics of the taxi business, nonetheless there will be a need to remake the taxi regulatory paradigm to prepare for a better transition.

Organisation of households: Household formation and the housing market

Phuah Eng Chye

I was formerly a securities regulator and equities analyst. I started writing these articles (and a book) because I felt that there were a lot of economic theories that didn’t seem to match up to the realities we are facing. This also means that a lot of policies (based on these theories) are wrong. So I’ve tried to make sense of how things worked based on the paradigm of an information society. Its a challenging topic and difficult to pin down. This means I have had to explore issues over a wide range of policy areas. Over the next few months, I will cover the service economy, the sharing economy, household and work structures before moving onto policy issues on the anorexic economy (role of corporates, basic income, housing affordability) and the financialisation process (capital, monetary policy, securities regulation).